The Umbrella Hypothesis

The Umbrella Hypothesis

by Mindan, Yanni, Jiayi and Syeda

The concept of revealed preferences provides economists with an idea of consumer demand. However, the theory can be applied only so far as consumer preferences and behavior remain unchanged. So how often do consumer’s preferences change and how well can we record these changes in order for revealed preferences to be effectively applied to predict consumer behavior? Our “Umbrella Theory” may help explicate the answers.

Let us assume that stealing of a good, U (or temporarily borrowing of the good without informing the owner with intentions to return it eventually), is the same action as consumption of the good U; in which case both stealing/borrowing and consumption reveal preferences. Let that good U be an umbrella. For the sake of simple microeconomic analysis, let there be a second good, P, and you can assume it is an iPhone. Now, imagine it is a bright sunny day with a cheerful weather forecast. Imagine further that you did not check the forecast in a hurry in the morning and carried out with you a stylish clear plastic umbrella. If you were to leave it or forget it anywhere on campus, you need not fear that it will be taken by anyone because no one will have a use for an umbrella in dry weather. Everyone will prefer P to U. However, this being New England, suppose it starts raining suddenly in the afternoon and you are one of the lucky few in possession of an umbrella. In such a scenario, would you feel safe leaving your umbrella lying around just about anywhere? We guess you would not. We think this is a great example of how suddenly and swiftly consumers’ preferences change and thus the application of our model needs to change as well.

You might be wondering why P is an iPhone and thinking to yourself that even if it is raining and someone is in need of an umbrella, that someone might still prefer P to U because P is worth more in monetary terms than U in all circumstances. Here, we would like to share a personal experience of one of our teammates. She lost her umbrella twice on campus. She returned to not find it in the library entrance lobby once and the other time it disappeared from Blanchard. However, she lost her iPhone three times on campus, once at a public fair, and each time she was called to be informed where she could pick up her phone. This leads us to believe that maybe the utility which leads to preferences for an object is derived more from how useful that object is at the given circumstance and not how valuable it is. However, as Professor Schmeiser pointed out, it might be the case that iPhones are returned because they are expensive and people who could take it would feel guiltier because of it, whereas an umbrella is not so expensive and the “guilt content” is significantly lesser and can be justified by a pressing need for an umbrella in that circumstance.

Whatever the counter-arguments might be, this umbrella-iPhone market is surely an interesting ground for the study of consumer preferences. If we reasonably assume that both are normal goods which have a CED=0 because they are unrelated, it is interesting to observe that despite the monetary value of the iPhone being higher than that of an umbrella, it is not “preferred” over an umbrella (through stealing or borrowing), under all circumstances; whereas even though the umbrella is cheaper it may be preferred more than an iPhone if it is raining and the consumer does not possess an umbrella; or even when it is not raining and a thief-by-nature steals the umbrella instead of the iPhone due to a lower guilt-content. In all circumstances here, the axiom of revealed preferences seems to hold!

Black Friday

Marginal Revolution discusses the economics of Black Friday here.

Imperfect Information

Imperfect Information

by Munazza, Maureen, and Yixue

In her computer science course at Mount Holyoke, Ashley was instructed to program a game. She designed a simple dice game similar to “Pig” with two players. Two dice were pictured on the screen, and the first player rolled the dice until he/she rolled a one, at which point all of the accumulated points would disappear, and the second player would begin rolling. The only way to hold points past turns was to click a hold button at the bottom of the screen, at which point it would become the other player’s turn. The first player to accumulate 100 points would win.

One night, while playing this game in the Pearsons common room, Ashley and her friend Cam began discussing rationality. “After all,” Cam argued, “there must be an optimal way to play this game so that I have the best chance of winning possible.”

“True,” Ashley countered, “but it’s so tempting to roll just one more time, and then again, and again… for example, I’ve rolled more than five times without rolling a one and have 41 points.” Intrigued by the conversation, Cam began observing other friends who played the game, and made some interesting discoveries about rationality and information.

If an individual is rational, then they should make decisions that maximize their personal utility based on all available information, and when discussing consumer choices in class, we generally assume perfect information, which leads to perfectly rational decisions. However, in reality, no one has access to perfect information, and this affects choices and behavior. When playing Pig, each player should choose the strategy that is most efficient in order to gain his/her desired outcome by rationally considering all options and then playing accordingly, without being tempted by the lure of trying their luck on a less optimal but “flashier” strategy. 

After watching many friends play this game Cam realized there were several factors that, on the surface, made some player decisions seem irrational. This was because different players had different goals. Some players were most interested in winning against their opponent, while others were most interested in gaining the highest number of points personally, irrespective of what their opponent gained. The third category of players were most interested in gaining the highest score on each roll, irrespective of their final scores and their opponent’s final score.

These three categories of players made very different decisions. Those who wanted to win against their opponent almost always pressed hold after one or two rolls, capturing small amounts of points on almost every turn. The second category rolled three or four times before pressing hold and sometimes ended up with more points than the first group, but not necessarily winning against their opponent. The third category rolled as many times as they could, often losing points after rolling a one, but occasionally gaining really large amounts of points per turn, which was celebrated as a victory in and of itself. Therefore, each player was making a rational decision depending on his/her personal goals while playing the game.

Cam’s second observation was based on information. Assuming that each player did not have perfect information about the specific mathematical probabilities of the game or about their opponent’s playing strategies, she noticed that some players modified their strategies as they gained more information by observing their opponent. Therefore, as information increased, each player adjusted his/her strategy accordingly. 

EXAMS: The Long and Short Run

EXAMS: The Long and Short Run

by Linda, Rudmila, Taniko, Xueqing

After getting done with this second midterm, we all started thinking a little bit about the long run and short run of things and its implication on our day to day lifestyles. Hence we decided to take a deeper look into the long and short run of Exams in this Microeconomics theory class.

We can assume that the entire length of the semester can be divided up as the following:

Beginning of semester – Midterm 1: Short run 1

Midterm 1- Midterm 2: Short run 2

Beginning of semester – Finals: Long run

Additionally, we also assume that our fixed ‘knowledge’ are the pre-requisites of Calculus and Introductory Microeconomics theory and our variable ‘knowlegde’ is what we acquire during the course of the semester.

During the first time period, i.e short run 1, things are pretty straightforward. We are only concerned about the eminent exam, which is Midterm 1. The thought of the long run doesn’t prevail in our brains since we do not know enough of the materials to be thinking of the long run.

During the second time period, i.e short run 2, we find ourselves in a tricky position. Here the eminent exam is Midterm 2. Since this exam is not cumulative, students often tend to focus more on the materials covered after Midterm 1, even though the concepts from the first midterm are carried over to the second midterm.

As a result, when we finally reach the last time period, i.e from the beginning of the semester to the Final exams, we are in a big mess. All that is fresh in our memories are materials that we covered in the second midterm. The first midterm materials are long forgotten. So we either decide to cram our brains out and study 20 hours a day, or we decide to go along with the things we already know and sort of bluff through the parts we forgot.

Neither of these are optimal solutions to this very common problem. We need to start thinking about the long run as soon as we have enough ‘resources’. Instead of solely focusing on recent materials for Midterm 2, we need to find some time to go over the materials from Midterm 1 so that when it’s time for the cumulative Final exam, we can still breathe.

In the short runs, we want a positive profit, aka positive grades. This will allow us to have a higher total average grade in the long run. This is very important because not having a positive grade in the short run might lead to ‘exiting the market’ aka dropping the course (in an extreme example of course).

Hence we need to plan ourselves accordingly and make the most of all the exams since that is the only way we can have a satisfactory outcome from the course.

Tragedy of the Cupcakes: Economics Mt. Holyoke Style

Tragedy of the Cupcakes: Economics Mt. Holyoke Style

By Lina, Olivia, Yang, and Xinyang

It was a normal Wednesday evening at Mt. Holyoke College as Suzie finished the first sentence of her five-page paper due tomorrow. “Woo! Great start. I’m really on a roll now!” she thought as she hit the space bar twice, ready to start the next sentence. 

She made the mistake of looking at the clock: 9:35 P.M.  “Nuts! M&C’s!” Suzie thought as she sprang from her desk without even saving her stellar paper. 

She grabbed her tacky souvenir mug and ran down the stairs to her dorm’s dining hall. 

As she sprinted toward the kitchen, she noticed people walking out with fistfuls of cupcakes: chocolate and vanilla.  Every person she passed was gripping at least three cupcakes.  Suzie knew this was a bad sign.  As she rounded the bend into the kitchen, her heart sank.  She stood there and took in the tragic sight: an empty tray under a few crumbs.  This was all that remained of the delicious treat that was there only five minutes before. Of course, Suzie was on time to M&C’s last night and was promptly served carrots and raisins.

She was shocked by the injustice of it all: some girls were happily munching away on three cupcakes at a time while Suzie was left with crumbs.

However, perhaps if she were an econ major, Suzie would not be so shocked.  Simple economics can explain the sad sight Suzie witnessed.  Economists call it the “tragedy of the commons.”  This phenomenon is explained by an analogy of a field shared by farmers.  The farmers allow each of their livestock to graze on the field endlessly.  Eventually the field is overgrazed and there is no more grass left for the animals to eat.  In this analogy, the tray of cupcakes is the field of grass and the hungry Mt. Holyoke students are the grazing cows… 

Let me try another explanation in case you didn’t like that one.  This M&C’s tragedy is explained by the fact that M&C’s (or the food put out at M&C’s) is what economists call a common good.  This means the cupcakes are rival, non-excludable goods.

Rival goods are goods for which one woman’s consumption of the good diminishes another’s ability to consume the good.  For example, if Nancy devours a chocolate cupcake, Suzie can’t eat that same cupcake. 

These M&C’s cupcakes are also non-excludable.  Excludability is determined by whether or not a person can be prevented from consuming the good.  For example, price can be an excluding factor.  Chocolate cupcakes sold in bakeries are excludable goods because they cost money.  Goods that cost money are always excludable goods because there will always be consumers who are unwilling or unable to purchase the good.  M&C’s are provided to students (and any other random townies who manage to wander in between 9:30 and 10 P.M.) for free and there are no staff members to enforce rules (for example, one cupcake per person). 

Suzie’s tragic discovery can be explained by simple economics and the fact that M&C’s presents Mt. Holyoke with a common good.  Unfortunately since the snacks at M&C’s are rival but non-excludable, they are considered common goods.  This sets students up for a nightly “tragedy of the commons” in their own dining halls…except, of course, on the nights they’re served carrot sticks and raisins.